چکیده انگلیسی

I investigate the incentive effects of disability pensions on disability retirement entry as a special type of early retirement. The implicit tax rate on further work is included as a forward looking incentive measure. A substantial change of the disability pension legislation caused exogenous variation in disability benefits in Germany in 2001 and is used to obtain estimates of individual's responses to financial incentives. Benefit levels appear to have no effect on the labour market behaviour. At the same time, there is a sizable and significant disincentive effect of implicit taxes on labour market income, indicating that alleviating such disincentives would likely increase labour force participation. Since the response to financial incentives occurs mainly among those in good health, such a policy might on the other hand imperil the aim of providing insurance against a health‐induced loss of one's working capacity

مقدمه انگلیسی

Losing the ability to work is one of the most personally disastrous and financially costly events in life. The social safety nets of all industrialized countries therefore provide insurance against the risk of becoming disabled and provide benefits for those with a limited working capacity. In the European Union in 2005, 7.9% of the total expenditures on social benefits were spent on disability. The expenditures on disability exceeded those on unemployment by about 30% on average (Eurostat, 2008). While being of high importance in the prevention of poverty among those who lose their ability to work, these benefits may on the other hand serve as an exit route to early retirement and encourage individuals to withdraw from the labour force early. In many countries in the European Union (e.g. Denmark, UK, Belgium and the Netherlands), permanent labour force withdrawal occurs on average about two years prior to the earliest age of entitlement for old-age benefits (OECD, 2009a). Entry into disability retirement may be misused to finance labour force exit before old-age benefits are legally available and thus regular retirement becomes feasible.
The previous literature regarding the effect of disability pensions on labour force participation led to ambiguous conclusions.1 The earliest analyses such as Parsons, 1980a and Parsons, 1980b, Leonard (1979), and Slade (1984) estimated the probability of labour force participation as a function of the replacement rate and found large elasticities with respect to disability benefits. In a second strand of the literature, later contributions used instrumental variable estimators to deal with the endogeneity of benefits and wages, such as Haveman and Wolfe (1984a), Haveman et al. (1991), Riphahn (1999), and Kreider and Riphahn (2000). They find much smaller to almost no response of labour force participation to disability benefits. For example, the elasticity found by Haveman and Wolfe (1984b) was about 80% smaller than the first result by Parsons (1980a). In a third approach, variation in benefit regulations over time and across regions is used to identify their effect on labour force participation (e.g. Gruber, 2000, Campolieti, 2004 and Autor and Duggan, 2003). Some studies use rejected applicants for disability benefits as a control group (Bound, 1989 and Chen and van der Klaauw, 2008). Those analyses found responses to disability benefits within the range of the first two approaches, yet the results vary greatly with the estimation method.
Although disability retirement is often interpreted as an alternative pathway into old-age retirement, well established methods for the analysis of old-age retirement decisions are seldomly applied for the analysis of disability retirement. There is widespread agreement in the literature on old-age pensions that not only the level of available benefits at the time of decision-making affects the retirement decision, but also expected future benefits if retirement is delayed for one or several years (e.g. Stock and Wise, 1990, Samwick, 1998, Gruber and Wise, 2004 and Heyma, 2004). While forward-looking behaviour in a disability retirement scheme should not occur in an ‘ideal world’, this is no longer true as soon as there are moral hazard and imperfect medical screening procedures. It is thus interesting to explore to what extent models developed for old-age pension schemes can be applied to the analysis of disability retirement schemes. However, forward-looking behaviour has rarely been integrated in models of disability retirement decisions. Notable exceptions are Burkhauser et al. (2004), van Vuren and van Vuuren (2007) and Iskhakov (2010) who use dynamic programming to model the timing of disability retirement. I add to this scarce literature by using forward-looking incentive measures in a model of disability retirement entry, while exploiting exogenous variation in these incentive measures caused by an institutional reform of disability pensions in Germany in 2001. Eligibility criteria are now stricter than before for some population groups, and benefits are substantially lower. The reform led to substantial exogenous variation in benefits, and moreover, in benefit accruals from an additional year of work during an anticipation period. This exogenous variation can be used to identify to what extent financial incentives affect individuals' labour market behaviour.
I find no behavioural response to benefit levels, but a substantial effect of the implicit tax on further employment. Responses to financial incentives occur mainly among those in relatively good health, while individuals in bad health do not adjust their labour market behaviour substantially. This corroborates that forward-looking behaviour occurs as a result of moral hazard and imperfect medical screening. The results are robust to the inclusion of different subjective and objective health measures and to the application of different distributional assumptions and discount rates.

نتیجه گیری انگلیسی

A recent reform of the German public disability insurance substantially lowered the benefits for individuals who suffer from health impairments and whose earnings capacity is reduced. This analysis investigated the behavioural responses to a decrease in benefits. I have estimated the probability of entering disability retirement and have considered forward-looking financial incentive measures as determinants. Administrative data containing very detailed information on employment and earnings histories and survey data containing sociodemographic and health information were combined. The results are robust to different health measures, discount rates and distributional assumptions.
As expected the most important determinant of the claiming of disability appears to be the individual's health status. There is no behavioural response to expected benefit levels independent of the individual's health status. Consequently, a mere cut of benefit levels does not appear to be an effective policy measure in order to set incentives for a longer working life. On the other hand, the forward-looking incentive measure, the implicit tax rate on further work, is significant and of sizable magnitude. This result is in line with most studies investigating old-age retirement, that usually finds that it is the further gain in income from further work that drives retirement behaviour, rather than the income level itself. This finding immediately leads to the conclusion that actuarial adjustments should be incorporated in the benefit system.
However, this policy measure is much more problematic in the context of disability pensions than in the context of old-age pensions. While there might be a trade-off between labour market income and disability pensions for some individuals whose working capacity is reduced but not fully lost yet, others in a very bad health status do not respond to financial incentives because labour market income is not feasible. The response to the implicit tax rate is substantially smaller and also insignificant for those in bad health than for those in relatively good health. They are likely to fall in poverty if actuarial adjustments reduce their pensions substantially. If the public retirement insurance does not provide a reasonable maintenance for individuals with reduced earnings capacity for health reasons, one of the main tasks of the public system of social security is neglected.
A solution to that trade-off might be found in other relevant institutional regulations. Boersch-Supan (2007) shows in a cross-country comparison, that the ease of access to benefits is the most important determinant of the up-take rate, particularly the strictness of vocational assessments. If the medical screening procedure was further improved, the current health situation was reassessed more regularly, disability was strictly assessed without regard to an individual's occupation, and rehabilitation programs or subsidies for the adjustment of workplaces were given priority over a generous pension granting policy, access to disability pensions could be limited more strictly to those who are not able to respond to financial incentives.